Author of Chapter together with Gustavo Santiago, a partner in the Energy area of Sion Advogados

Chapter: The Behavior of Electricity Sector Agents and the Need to Maintain Contracts

Book Description:

The new coronavirus pandemic has necessitated a series of global initiatives to reduce its spread, forcing public authorities to implement restrictions on the movement of people, gatherings, and activities. These measures have caused a significant decrease in economic activity, leading to a global recession. In other words, the reduction in the production chain has weakened internal markets, causing them to decrease their production due to the pandemic and its related impacts. The domino effect is inevitable, and given that the demand for electricity is a dependent variable of economic activity, consumption forecasts are generally negative.

Although the sector has shown some resilience during crises and has faced various atypical scenarios, the intensity and speed of this pandemic have required increasingly stringent measures to maintain the integrity, efficiency, and sustainability of the electricity sector and its agents. In this context, the Ministry of Mines and Energy established, through Ordinance No. 117GM on 03/18/2020, the Sectoral Crisis Committee, which is responsible for coordinating, monitoring, guiding, and supervising the actions to be taken by the administration and sector agents.

Additionally, the Monitoring Cabinet for the Electric Situation (GMSE) was created with the objective of (i) identifying the effects of the pandemic on the electricity market; (ii) monitoring the economic and financial situation of the sector, as well as the demand and supply of electricity; and (iii) coordinating studies of structural proposals to preserve the balance in relations among all sector agents, quality, and tariff moderation. Likewise, the representative associations (Generation, Distribution, Commercialization, and Consumption) of the electricity sector are jointly seeking alternatives and consensual solutions among agents to address COVID-19-related issues.

The main concern is the preservation of cash flows in the sector, particularly related to the reduction in revenue for electricity distribution companies, which, under the current regulatory model, absorb the greatest risks caused by market fluctuations. This is because, in addition to directly serving the final consumer, distributors are responsible for collecting payments from most consumers in the production chain. In other words, distribution in the Brazilian Electrical System is the main pillar, as its financial flow sustains the entire chain, including the transmission and generation systems, starting with the collection of payments at the distribution level.

The most significant impacts of COVID-19 on distribution include: (i) reduced market due to decreased consumption, both in terms of electricity (kWh) and demand (kW); and (ii) the possibility of increased delinquency due to consumers' limited ability to meet their commitments to electricity distributors. Various measures were taken to preserve the public service of electricity distribution and maintain the supply of electricity to consumers.

The National Electric Energy Agency (ANEEL) decided to release resources from the System Service Charges (ESS) for the consumption segment in both captive and free contracting environments, injecting over 2 billion reais. Regarding residential consumers and essential service providers, Normative Resolution No. 878/2020 outlined some significant measures, such as a 90-day prohibition on electricity disconnections and exempting consumers benefiting from the social tariff from paying for consumption up to 220kWh/month from April to June 2020, with a contribution of 900 million reais.

However, this social measure, aimed at ensuring the continuous supply of electricity without the possibility of suspension due to non-payment, and the reduction in market demand, created a perfect storm for distributors, who must fulfill their commitments. Concerning contracted energy, distributors will face market expectations that will result in over-contracting, with surplus energy being settled in the short-term market (MCP) at the Settlement Price for Differences (PLD), which tends to be near the regulatory floor due to decreased demand.

Given the drastic reduction in economic activity and the consequent reduction in electricity consumption, various Group A consumers - whose supply voltage is equal to or greater than 2.3 kV and who use a binomial tariff, composed of demand charges and a proportional part to the consumed energy - requested the flexibility of invoice readjustment, so the distributor would charge only for the consumed energy or even defer billing to the post-pandemic period. Demand charges are fixed because they refer to investments made by distributors to provide the necessary infrastructure to the consumer.

To reduce over-contracting, some distributors utilized the Monthly Surplus and Deficit Compensation Mechanism (MCSD) during the pandemic, which was quickly rejected by a group of electricity traders. Traders filed administrative requests with ANEEL, arguing that distributors were acting with manifest abuse of rights and usurping the limits imposed on them. The Brazilian Association of Energy Traders (Abraceel) issued a statement, asserting that (i) electricity purchase and sale contracts are financial instruments, (ii) they do not assume physical delivery of the product, and (iii) contractual differences are settled at the PLD price in the short term.

Similarly, generators expressed concerns about the high volume of notifications invoking force majeure or unforeseen circumstances to justify contractual defaults. Representative associations of generators emphasized the need to maintain the economic-financial balance of contracts, requesting ANEEL to evaluate the situation of all chain links and explicitly address force majeure occurrences in Regulated Contracting Environment Electricity Trading Contracts (CCEAR).

Given the situation, the Brazilian Electrical System undeniably requires legal and regulatory security to attract private investments for its maintenance and allow rapid expansion as the economy recovers post-pandemic. Legal security must guide legal relations, and claims of unforeseen circumstances and force majeure should not be used indiscriminately but require case-by-case analysis to minimize the impact on the involved parties.

Therefore, consensual dispute resolution methods, especially negotiation, are recommended to maintain contracts and avoid prolonged litigation, especially in the current scenario that demands quick responses to the problems faced.